To What Extent Are Spanish Investors Financially Literate?. Does Their Portfolio Management Notions Contribute in the ‘Sensemaking’ of Their Investment Decisions?

Abstract

The ways in which investors engage in their investment decisions are often far from the behavioural theories described in the literature. In line with the increasing interest in the field of Behavioural Finance lately, this piece of research aims to shed some light over the intricate criteria and processes undergone by investors before making investment decisions. Specifically, the focus has been placed on a sample of eight Spanish independent investors who share a common interest and activity: they invest in the capital markets for their own account. Among the different responses obtained through conducting the interviews, there is a strong determining factor in the study: age. Depending on the age of the interviewee, the responses regarding their investing criteria were either more risk loving or more risk averse. Moreover, considering the tremendous financial shock lived in Spain since 2008, the decisions about asset selection and purchase are now fundamentally based upon the prudence principle. Investors are more reluctant to facing risks and prefer the assets considered a ‘flight to quality’, such as Fixed income securities like Treasury bills. With the growing and fast-paced technologies and innovation, a massive amount of information has been made available to all market participants willing to build a portfolio. The perception of the information available has also been investigated in this research and, one of the findings have been that data is very useful but experience is needed in order to successfully filter and classify the reliable and unbiased portions of information. The report, therefore, provides thorough insights into the rationale behind the sampled investors’ decisions, drawing on theoretical assumptions and other existing literature of Portfolio Management and Behavioural Finance to dilucidated whether investors rely on their theoretical notions and concepts when constructing their portfolio, or instead they draw on their past experience to do so.